7 minute read
Our markets
by gpe_london
Our markets recovered over 2021 as the impact of COVID-19 abated. However, the recent tragic events in Ukraine have once more clouded the outlook, moderating GDP forecasts and accelerating existing inflationary pressures.
Macro-economic backdrop
– IMF estimates global GDP growth of 6.1% in 2021 and forecasts 3.6% growth for 2022 and 2023. – UK still forecast to grow; 3.8% GDP growth in 2022 (Oxford Economics). – Consumer confidence at lowest level since July 2008 led by higher interest rates and rising inflation. – Deloitte CFO survey: Geopolitical risk now primary concern; 56% rating financial and economic risk
‘high’ or ‘very high’ in Q1 2022. – Composite PMI surveys have moderated but continue to indicate expansion; 57.6 in April 2022. – Inflationary risks remain; UK CPI 6.2% in March 2022, forecast to remain elevated.
Occupational markets1
– Activity levels have recovered; central London take-up 10.6 million sq ft in year, up 134%. – Central London active demand remains healthy at 6.1 million sq ft, down 5% year on year. – Availability remains elevated at 26.0 million sq ft, up from 25.4 million at 31 March 21 and 66% ahead of the ten-year average. – Central London vacancy rate 9.0% at 31 March 2022; up from 8.7% last year. – Supply remains tight; availability of space newly completed or under construction low at 30% of total stock (7.9 million sq ft).
Investment markets1
– Restrictions on international travel still limiting buyers’ ability to inspect buildings and conduct effective due diligence. – Demand for London real estate robust; office investment deals £10.0 billion in 2021; up 32.9% year on year.
First quarter of 2022, highest on record at £5.5 billion. – We estimate that £6.6 billion of real estate is currently on the market to buy versus £36.7 billion of equity demand looking to invest. – Given the weight of money for offices, prime yields remained firm; CBRE report prime yields of 3.25% and 3.75% for the West End and City respectively. – Retail yields now stable; 4.00% Regent Street, 4.25% Oxford Street and 2.75% Bond Street.
The West End
–Office take-up 4.0 million sq ft; up 135.0% on preceding year. –Availability 5.6 million sq ft, down 19.8%.
–Vacancy 4.6% down from 5.8% at March 21, Grade A vacancy only 0.5%. –Prime office rental values £125.00 per sq ft at 31 March 2022, up 13.6% in year. –Retail vacancy stabilised;
Zone A rents unchanged on key retail streets.
The City
–Office take-up 4.2 million sq ft; up 113.4% on preceding year. –Availability 12.2 million sq ft, up 8.2%. –Vacancy 12.9% up from 11.7% at March 21, Grade A vacancy only 2.7%. –Prime office rental values £71.00 per sq ft, up 1.4% in year.
Near-term outlook
We actively monitor numerous lead indicators to help identify key trends in our marketplace. Over the last year, our property capital value indicators have marginally improved, initially driven by the continued economic recovery, but more recently offset by the economic impact of geopolitical tensions. Today, we expect investment activity in the central London commercial property market to be supportive with yields trending flat in the near term. In the occupational market, given a strong leasing and rental performance of the portfolio, our rental value growth range for the financial year to 31 March 2023 is positive at between 0.0% and 5.0%, predominantly driven by the positive expected performance of our office portfolio.
Our markets are evolving, with a number of key themes changing the way we operate and shaping the services and spaces that we provide.
The future office
The pandemic transformed the way we both live and work, with working from home temporarily becoming the new normal. As we emerge from the pandemic we fully expect that the office will remain the primary workplace for the majority of businesses. However, it is clear that many people have enjoyed the ability to work virtually. The future office will need to accommodate both in person and virtual working, adopting a hybrid approach to deliver the best of both worlds.
Our response
Looking forward, once the pandemic is behind us, the workplace must be somewhere that is worth travelling to. The best offices will need to act as a magnet for their workforce, providing services and amenities that employees cannot get at home. The quality of the office experience matters. In our view, the best buildings will need to provide flexible work settings, support the health and wellbeing of employees, promote sustainability and be more human in scale and connected to the communities in which they sit. They also need to be well connected to high quality public transport to minimise the impact of the commute. Buildings that cannot meet these criteria risk being stranded. This plays to our strengths.
The growing demand for flexible spaces
London has witnessed significant growth in the demand for flexible office and co-working space in recent years. Advances in technology, the growth in start-up businesses, increased mobility in the workforce and the rise of the gig economy have helped drive this growth. A plethora of new suppliers have entered the market to meet this demand. Whilst COVID-19 slowed the growth of some co-working operators, today flexible spaces comprise an estimated 6% of the central London office market.
Our response
Whilst for many businesses, securing high quality, well-located space for longer-term occupation is vital, we recognise that customers are increasingly seeking an element of flexibility for some parts of their business. To meet this growing demand our Fitted offer provides dedicated, fully-furnished space on flexible terms allowing customers to move in and out of the space with ease. More recently, we have rolled out a number of Fully Managed spaces, including at 16 Dufour’s Place, W1, which extends our proposition to provide additional services and amenity. Interest in these spaces has been positive, they typically let quicker and we are charging a premium for a hassle-free real estate experience. Over time we expect this to be the default requirement for spaces of less than 10,000 sq ft.
See more on page 28 Structural retail change
Since 2016, more shops have been closing in the UK than opening, with sales from physical stores moving online. This trend has been greatly accelerated by COVID-19 with successive restrictions dramatically reducing retail footfall, particularly in city centres. Unsurprisingly, central London, with its reliance on office workers and tourism (both domestic and international), has been especially hard hit. Retailers have had to adapt and, in some cases, greatly reduce the physical space they occupy.
Our response
We believe that central London’s attraction as a premium retail destination will persist. Its unique combination of tourist destinations, flagship stores, selection of restaurants and a deep cultural offer remains and will continue to attract shoppers from around the world.
Retail comprises 20% of our portfolio by value. We aim to provide high quality, modern retail units into locations with enduring appeal. Accordingly, the bulk of our activities centre on the prime shopping streets delivering new retail experiences into locations that will benefit from the expected opening of Crossrail this year. Whilst interest was muted in the first half of 2021, as restrictions have eased, retailers have a more positive outlook and lettings, together with enquiry levels, are increasing.
The need for sustainable spaces
The demand for highly sustainable spaces is growing fast. Customers, together with their employees, are increasingly aware of their impact on the environment and are demanding spaces with the highest sustainability and wellbeing credentials. Regulation is also accelerating, both through the planning regime and from forthcoming legislation to tighten EPC regulations. Sustainability is therefore no longer only a moral obligation, it is a prerequisite for high quality spaces and a strategic and economic imperative.
Our response
Sustainability is becoming an increasing differentiator between the best space and the rest. Therefore, owners of real estate need the expertise to either create new high quality spaces or retrofit existing space in line with the new and evolving requirements. Buildings that are not repositioned risk being stranded. We see this as an opportunity. We are an experienced developer with a track record of delivering the highly sustainable buildings that customers demand. We also know how to reposition assets through refurbishment and renovation. Furthermore, buildings with poorer sustainability credentials are a potential avenue for future acquisitions, allowing us to create value by transforming unloved buildings into desirable, highly sustainable, prime real estate.
